Balance sheet versus securitized CMBS lending entails greater risk for banks, which is more pronounced on transitional, or unproven assets with unstabilized cash flows. The risk is compounded with retail assets, given the current retail environment, often referred to as the “retail apocalypse”. The retail sector is undergoing fundamental change, with malls closing, retailers liquidating, and demand shifting online. This dynamic requires lenders to more prudently assess markets when financing retail properties. At Townhouse, our in-depth retail experience includes evaluating one-of-a-kind assets, and large portfolios, which is crucial for clients lending in this sector, and a core competency.


Our client, a top 40 global banking institution, was re-capitalizing a new, upscale, regional retail mall being built but not yet open, and believed to be the only new U.S. mall. The property was situated at a high-traffic intersection in an affluent trade area, with strong demographics, a growing population, an experienced, public sponsor, but no operating history, and was not immune to shifting consumer preferences. Some CRE professionals viewed developing and financing a new mall in this retail climate as reckless. The client relied on Townhouse to conduct an in-depth analysis, evaluate the sponsor’s projections, and deduce reasonable assumptions for future performance, with the intent of convincing senior bank management the project was viable, and the loan was worth holding on their books. Of particular concern was competition from nearby affluent downtown boutique retail districts, and how it would impact the mall. The cash flow projections were complicated by tenants paying rent based only on sales, and an interim tax abatement. This required forecasting future sales over the loan term and beyond, with no history. The loan would also be syndicated, requiring assurances for co-lenders the risk was manageable, the mall would stabilize, and the loan could be refinanced. The assignment mandated excess due diligence, a Townhouse specialty, given we typically exceed client expectations.

What we did

An internal team was assembled to fully underwrite the transaction and evaluate the inherent risks. At Townhouse, teamwork is key, along with having the right people. We thoroughly investigated all aspects of the property and market, including but not limited to the following:


• Visited the development site to gauge access, visibility, exposure, and other critical factors.


• Measured leasing progress as to timing for projected opening and eventual stabilization.
• Performed comprehensive lease reviews for potential impacts to cash flow.
• Gauged tenant mix, including proportion of restaurant and entertainment venues.
• Evaluated retailers at risk for filing bankruptcy or liquidation, including credit ratings.
• Compiled nearest locations for all leased tenants, for risk of future closing and consolidation.
• Assessed anchor department stores for quality, financial condition, market position, competition, and future chain prognosis.


• Evaluated competing malls in the trade area for proximity, access, configuration, tenant composition and quality, sales levels, demographics, and other critical factors.
• Walked downtowns of nearby affluent communities to catalog and assess existing retail for competitiveness, and tenant duplication.
• Canvassed surrounding area development for potential new demand, along with complimentary and competitive new retail.
• Compared demographic data from multiple sources within the trade area and beyond.

Cash Flow Projections

• Devised estimates of future cash flows incorporating speculative income from tenants paying rent based on sales, and performing sensitivity and scenario analyses.

How it worked

Our analysis revealed the following competitive advantages for the mall upon opening.

• The new mall sponsor generally avoided leasing to typical mall tenants of years past, preferring to inject a carefully curated, high-quality blend of established, new to market, category leading, experiential, and emerging concept retailers, tailored for the local market.
• The new mall was intended as a destination for both locals and tourists, and as an alternative to urban centers. The mall would have a modern design, and feature unique amenities including public spaces such as indoor/outdoor sculpture and rooftop gardens, public art installations, an exterior public plaza with river views, plus bowling, bocce, co-working, and other conveniences.
• The mall would benefit from anchor exclusivity, not only in the trade area but entire state. Retail data in the trade area indicated a strong affinity by shoppers for the anchors, over others in competing malls.
• The next nearest locations for leased tenants were concluded largely not to constitute a threat of potential closure for future consolidation.
• The downtowns of nearby affluent communities were judged to be separate markets, which were complimentary and less competitive than feared.
• The investigation revealed over 3,000 new housing units either recently completed, under construction, or in planning, which were expected to generate new demand for the mall once open.
• Prior familiarity with the comparable malls enabled us to conclude they were inferior, and the new mall would achieve higher levels of sales.
• The project was viewed favorably by the city as an anchor for a designated re-development area, that would integrate well with the surrounding neighborhoods, and generate jobs, taxes, and potentially spur more development.

The retail sector continues to undergo fundamental change, with stores closing, chains liquidating, and demand shifting online. Some retailers that were thriving only recently, face diminished prospects for continuing to operate. Successful merchants have adapted by melding the physical and digital realms, while retail center owners seek more unique tenants to woo traffic. This dynamic requires caution for those investing in retail assets, and when forecasting related returns. The client lacked retail expertise, and hence focused on acquiring and holding the 25 best assets, preferring stable cash flows with more modest income and value growth potential. Most of these properties were grocer and/or discount retail anchored. Higher returns, although speculative, were projected for the portfolio assets with value-add upside potential. This derived from adding square footage, re-developing or re-tenanting big-box/anchor vacancies, and developing excess land for mixed-uses such as hotel, office, or multi-family. At acquisition, the client planned to retain the top 25 properties, and sell the remaining assets concurrently. Those with value-add upside were to be sold at a premium to then current market values, based on their future development potential. This approach would reduce the acquisition basis of the 25 assets to be kept. However, THP’s rigorous analysis concluded the seller’s projections were too aggressive, and could not be met. The client entered into negotiations but was unable to reach agreement with the seller. The retail assets were deemed overpriced, and if acquired would depress target returns. THP provided realistic yet impartial projections, which ultimately prevented the client from overpaying for the acquisition, recalling the adage “you make your money when you buy, and not when you sell”.